Salaried class bears 1,550% heavier tax load than traders

ISLAMABAD:

Pakistan's salaried class continues to shoulder a disproportionate tax burden, contributing a staggering Rs111 billion in income tax during the first quarter of the current fiscal year - 1,550% more than the taxes paid by the ruling party's blue-eyed traders.

The Rs111 billion collected from salaried individuals between July and September was also nearly Rs40 billion, or 56%, higher than the same period last year, according to data compiled by tax authorities.

In the first quarter of the last fiscal year, the salaried persons had paid Rs71 billion.

The government, under Prime Minister Shehbaz Sharif, has abnormally increased the tax burden on salaried individuals in June this year, opting for higher taxes rather than cutting expenditures or expanding the tax base to include untaxed sectors.

Out of the Rs111 billion, the Rs28 billion income tax has been paid by all the federal and provincial government employees who got a 20% to 25% increase in their salaries in the budget.

The remaining Rs83 billion income tax was paid by the private sector employees who often do not get annual increases in their salaries. The average inflation rate in the last fiscal year was 23.4%.

Compared to the Rs111 billion that corporate, non-corporate, federal and provincial government employees paid, the Federal Board of Revenue (FBR) collected only Rs6.7 billion on the supplies of the goods to the traders.

The tax contribution of the salaried persons was 1550% more than the combined taxes collected on account of goods supplied to the traders.

The government had increased the withholding tax rate on supplies of traders by 150% to 2.5% in the budget in the hope that the traders would come into the tax net. However, the traders directly paid hardly Rs1 million to the FBR, which was equal to 0.001% of the target set by the International Monetary Fund (IMF).

For the July-September quarter of this fiscal year, "The floor on net tax revenues collected by the FBR from retailers under the Tajir Doost scheme was Rs10 billion".

Instead of providing any relief to the salaried and non-salaried individuals, the government increased the effective income tax rate of salaried persons to nearly 39%, for association of persons to 44% and for non-salaried individuals to 50%.

What the current chairman of FBR, Rashid Langrial, himself described as an unjust tax, the government had also imposed a 10% surcharge on the income tax paid by a person with an annual income of Rs10 million.

The FBR had told the federal cabinet that after an increase in the tax rates in the budget, the salaried class's additional tax contribution in the current fiscal year 2024-25 will be Rs85 billion. However, the results of the first three months show that the FBR underpitched the salaried class's additional taxes. It has already collected Rs40 billion additional taxes in just three months.

The details showed that the non-corporate salaried persons paid Rs50 billion income tax in just three months - up by Rs14.4 billion or 41%. The corporate sector employees paid Rs32.4 billion income tax - also higher by Rs11.6 billion or 56%.

The employees of the four provincial governments paid Rs16.6 billion income tax - higher by Rs8.5 billion or 103%. The federal government employees paid Rs11.4 billion in income tax, which was Rs5.3 billion or 85% more than last fiscal year.

The IMF's last week staff report of the $7 billion loan package disclosed that the government and the IMF were in full agreement to throw more burden on the already overburdened salaried persons.

"We aim to increase the Personal Income Tax and Corporate Income Tax yield by Rs357 billion by rationalising the tax rates for individuals and reducing the number of rate slabs to five for salary and non-salary individuals", according to the Memorandum for Economic and Financial Policies signed by Pakistan's finance minister.

The MEFP further stated that for the non-salaried individuals, "we will increase the rate for the high-income slab earners of above Rs5.6 million (annual) to 45%". For the salaried individuals, the finance minister stated in the MEFP that for the salary individuals "we will lower the upper threshold for the fifth slab to an annual income of Rs4.1 million".

On one hand, the salaried class is burdened with higher taxes despite their declining net incomes, while traders, favoured by the government, remain largely untouched. Even minimal taxes, as low as Rs100 per month under the Tajir Dost Scheme, go unpaid, with their total contribution by mid-October amounting to just Rs1.2 million.

The IMF program aims to boost general government tax revenues to 12.3% of GDP this fiscal year, but it appears that the bulk of this burden will fall on salaried individuals.